HSBC supports clients in challenging times
Published: 23 July 2009
China's PC giant Lenovo gets a holiday from syndicated banks
Lenovo is changing the way the world looks at technology products from China. Currently the fourth-largest PC manufacturer in the world, the brand is also building a reputation for reliability.
Spurred by its acquisition of IBM's Personal Computing Division in 2005, Lenovo availed itself of a syndicated USD400 million credit facility, for which HSBC was joint mandated Coordinating Arranger.
But in the initial aftermath of the global financial crisis, and because its accounts were mostly corporate, Lenovo missed its sales targets and foresaw a potential breach of financial covenants under the syndicated facility. As an experienced borrower, Lenovo was aware of the importance of addressing the issue with the syndicate of lenders, sooner rather than later. Lenovo wanted to arrange a waiver and amendments to the existing financial preferences with its creditors, and approached HSBC for advice. It wanted to get HSBC's counsel, as its principal banker and an experienced syndicated deal arranger, as to the extent of amendments it should seek from creditors and how it should approach creditors with its requests.
Special relationship
Lenovo's relationship with HSBC started in the 1990s and the Bank now has a well-established relationship with the company across various countries and territories such as China, Hong Kong, Singapore, the USA and others worldwide.
"We hold regular dialogues with Lenovo's management team, therefore we are in an unparalleled position to understand the company's business strategies and requirements," said Roddy Lau, Director, South and West China, Global Banking, HSBC Bank (China) Company Limited, whose team manages the banking relationship with Lenovo globally. This knowledge enabled the Bank to tailor multi-product solutions for the company globally in areas including Global Markets (GM), Asset-backed Financing (ASF) and Debt Capital Markets (DCM).
Yorkie Wong, HSBC Director with DCM, China, said: "Lenovo has long been a premium name in the industry in China and it ascended to the global market in 2005. It's close to HSBC because of our current emerging-market focus, specifically on China, and our global network."
Mr Wong said HSBC's deal team suggested three options to Lenovo:
- Arrange a new syndicated loan to pay off the current one
- Based on the current loan agreement, negotiate with the lender banks for a holiday or waiver (which would allow Lenovo not to meet its financial covenants for a period of time)
- Negotiate a waiver (while also making some concessions to enhance the lenders' confidence in Lenovo's commitment to repay) and raise additional funding through a new loan
The third option was a combination of the first two propositions and the HSBC deal team found it to be the best. If approval from the lenders were not unanimous, a new source of capital would be needed to cover the shortfall in funds caused by the pulling out of some banks from the syndicated facility.
Winning lenders' support
The biggest challenge by far was to convince the 24 lenders of the syndicated facility, HSBC included, who were also feeling the adverse impact of the global financial crisis, to condone Lenovo's obligations for a season.
"To successfully execute this, we suggested that Lenovo work out a solution of waivers to the current loan. But beyond this, there also needed to be some new terms and conditions to reassure the lenders of Lenovo's intention and ability to pay," Mr Wong said. "There had to be a give-and-take."
Consequently, Lenovo agreed to an adjustment in the interest margin and to pay a fee to the banks who would agree to the waiver. "As a sign of its strong self-confidence in the company's long-term prospects, Lenovo also agreed to keep a certain minimum amount of cash on hand during the wavier period," said Mr Wong. This was intended to assure lender banks that, should the worst happen, Lenovo would still be able to honour its financial obligations.
HSBC helped work out a cash-flow projection for Lenovo, allowing the company to determine how long a bank holiday it should ask from creditors. It was projected that a year's holiday from certain financial covenants of its syndicated loan would be all the company needed.
Lenovo was willing to give an 'Early Bird' fee as an incentive to lender banks that would support the proposal before a set deadline. This tactic would have two important effects: hasten approval by supportive banks and create a 'snowball effect' whereby undecided banks would be encouraged by the early consent from other banks to give their support as well.
A matter of time
A critical part of the success of Lenovo's bid to get a financial breather was how and when to make the proposition to lender banks.
"Our strategy for Lenovo was twofold," Mr Wong said. For a resolution to be passed, banks that support it should represent at least two-thirds of the loan amount.
"The first stage called for client to first solicit the views of the major deal arrangers or banks," he said. Five major international banks were involved, whose positions on the matter were deemed to be the deciding factor as to where the rest of the lenders would stand on any issue. Their approval would give Lenovo a good chance of also getting the majority's approval.
[In view of the crisis], Lenovo wanted to arrange a waiver with its creditors.
"The consent process was conducted in the most effective and efficient manner," the DCM executive said. Lenovo approached HSBC and the major banks and informally presented its proposal. They were open to the idea but the support of the major banks alone would not be sufficient to carry the approval as this did not yet meet the majority consent threshold requirement.
Cascading support
Shortly after gauging the views of the major banks, Lenovo, as advised, made its formal announcement on 20 April to the whole syndicate when it was confident that the major players would give their approval and endorse the idea to the smaller banks.
As soon as the formal proposal went out, support immediately started to come in. When it became clear to the lender banks that the motion would get the support of the majority, the undecided syndicated banks became motivated to give their consent before the 'Early Bird' deadline as well so they could receive their incentive fee.
Majority lenders' consent was obtained by 7 May. Unanimous lenders' consent was obtained a day later, well ahead of the 15 May deadline.
Deal well done
"This is a shining example of a complex and sensitive deal, involving several parties, that was played out impeccably... and HSBC played a key advisory role to Lenovo among the major banks involved in the deal," Mr Lau said. "The unequivocal support to Lenovo by Global Banking, as well as our seasoned experience in DCM was appreciated and recognised by the client. It is also one of the many examples showing how Global Banking is well positioned in China supporting the PRC corporates 'going out'."
More than being a lender, HSBC takes the extra steps for a client's business. Because that's what a partner does.
Asian Bond Indices
Yorkie Wong is Director for Debt Capital Markets, originating DCM business, structuring loans and bond issuances, and executing deals for HSBC's Syndicated Finance group in Asia Pacific since 2000.
Mr Wong has exposure to the various sectors of debt finance, including energy, telecommunications, debt restructure, leverage buy-outs and financial institutions.
He is recognised as a CPA by the Hong Kong Institute of Certified Public Accountants, as an FCCA by the Association of Chartered Certified Accountants, and designated as a CFA of the CFA Institute.
Asian Bond Indices
Roddy Lau joined HSBC in 1992 as a management trainee with a Master's degree in Economics from the University of Hong Kong. He gained experience in various departments such as Personal Financial Services and Commercial Banking before assuming the position of Global Relationship Manager in DIG, Global Banking in 2000.
Since 2007, Mr Lau has been seconded to HBCN, taking up an expanded role as the Head of Mainland Corporates, South and West China.
Mr Lau is also a holder of ACCA and CFA qualifications.
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